NOT Going NON-Profit
The not-for-profit corporation: eligible for grants, contributions, government funding, corporate sponsorship, tax exemption. Sounds good. But will your role change? You can be chief executive officer or artistic director; you can draw a salary and bonus; you are eligible for deferred compensation plans and other specialized retirement plans; you can be a member of the Board of Directors.
But you can't be an owner. And you can't take your profits. Your not-for-profit corporation will be subject to government and community scrutiny. Your books will be open to any contributing or granting entity. Is it worth it? Here are some reasons for rethinking the not-for-profit option:
Paperwork, red tape, and added expense
Establishing a not-for-profit corporation is the easiest and least expensive part. But beware of the costs: the filing fee for the not-for-profit may be higher than for a regular business corporation; and there may be additional fees for filing with specialized state or local governmental agencies. If, for example, your corporate purpose is dance education, you may need state department of education approval.
Tax exemption doesn't come automatically with your not-for-profit corporation. You will have to apply to your state's taxing authorities for exemption from state sales tax. You will have to apply to the Federal Internal Revenue Service for "501(c)(3)" tax exempt status so that contributions to your not-for-profit will be deductible to donors. That application requires, among other things, financial disclosures and identification of present or potential donors. It isn't particularly complicated, assuming your corporation is new and your books and records are meticulous. Nevertheless, you will want your attorney to look over that application, as well as any other, before you submit it, not after it has been returned as incomplete or unacceptable.
Inevitably, there will be attorneys' fees (unless you find a lawyer willing to work pro bono publico, that is, for free or for a reduced fee). You should consult with an attorney who is familiar with not-for-profit corporations. Your attorney will know how to "form" a corporation. She has access to services that you don't have. Let your attorney help you draft your corporate purpose to make it versatile, yet consistent with your not-for-profit objective. Let your attorney help you get the corporation started by applying for a Federal Employer's Identification Number ("EIN", the corporate equivalent of a social security number) and for preparing and filing all the other forms the State requires of newly formed corporations, which are usually tax-related. Consult closely with your attorney in choosing the members of your Board of Directors, and let your attorney conduct the "first meeting" of the Board. Let your attorney be your new best friend to create the not-for-profit corporate entity that will serve your business and professional purposes. But, before you let her work, discuss her fee and make arrangements to pay it.
And you'll probably have to spend more on accounting services, primarily to prepare and submit an annual audited statement or income report. Not-for-profit corporations are subject, in theory at least, to increased scrutiny because of the public trust placed in them: you are allowed to use public money for your own purposes but you must be prepared to account for it.
And you may have to hire professional grant writers and fundraisers to help you take advantage of your not-for-profit status. As there is less and less government money available to support the arts, so you may need to hire professional consultants to research and apply for private funding. Bake sales and tickets to the Spring workshop won't buy you a building. Your wonderful ideas for new programs may not become reality without the help of experienced, and highly paid, specialists.
Control
As the owner of a business, you have total control. You don't even have to listen to advice, much less take it. If you go not-for-profit, you will lose that independence and you run the risk of losing the business entirely. The corporation will be run by a Board of Directors, which you may or may not be able to control. At its inception, the not-for-profit corporation may have as few as three directors, you and two people you trust. As the business is awarded grants or public funding, the composition of the Board may have to change. Members of the community may have to be included; faculty members or relatives may have to be dropped; the size of the Board may have to be increased, diluting the votes you can count on. As an employee, no matter at what level, you are answerable to Board of Directors. The Board hires, and the Board fires.
What should I do?
Going not-for-profit is ultimately a business decision. Do you have a vision of the future of your business? With you? Without you? Are you required to be not-for-profit by the terms of your lease or other contractual obligation? What are the benefits of not-for-profit status that your business can take advantage of? Will the administrative inconveniences, and possible additional expenses, be justified? Have you considered keeping your regular business entity, and establishing a not-for-profit "branch" for your scholarship programs and performing group?
Consult with your family members who may want to inherit the business someday, and then consult with your accountant and your attorney.